Oct. 1 (Bloomberg) -- Junk-bond trading in the U.S. has
fallen the most since 2008 as the Federal Reserve keeps
investors guessing on when it will slow bond purchases that
bolstered demand for the debt.

Daily transactions in speculative-grade notes have averaged
$4.87 billion since June 30, 18.1 percent less than volumes in
the first half of the year and the biggest drop-off since the
credit crisis five years ago, according to data from Trace, the
bond-price reporting system of the Financial Industry Regulatory
Authority. Investment-grade trading, which has been supported by
Verizon Communications Inc.’s record $49 billion sale last
month, is down 13.6 percent during the same period.

High-yield bond investors are showing greater restraint
than in the first half, when yields plunged to the lowest on
record and buyers demanded the least compensation relative to
Treasuries since October 2007. Trading in the third quarter
appeared to have been “turning into a full-scale rout” Sanford
C. Bernstein & Co. analyst Brad Hintz wrote in a Sept. 27 note,
cutting the earnings estimates of dealers Goldman Sachs Group
Inc. and Morgan Stanley.

Reluctant Sellers

“There’s still a level of uncertainty out there that keeps
people from having that extra level of conviction that they
would have,” Brian Kennedy, a portfolio manager at Loomis
Sayles & Co., which had $188 billion of assets under management
as of June 30, said in a telephone interview. “It’s hard for us
to imagine that we’d have a real pickup in volume” through
year-end.

Fixed-income trading volumes may have declined 20 percent
to 25 percent on average in the three months ended Sept. 30,
according to Hintz. Investors are reluctant to sell their debt
holdings unless something fundamentally changes with the
corporate borrower, because it may be difficult to repurchase
the notes in the future, said Citigroup Inc. strategist Stephen
Antczak.

It’s getting harder to quickly maneuver in the company-debt
market, he said, with Wall Street’s biggest banks paring
holdings in the face of higher capital requirements set by the
27-nation Basel Committee on Banking Supervision and risk-curbing rules laid out by the U.S. Dodd-Frank Act.

Awaiting Evidence

Trading volumes have plunged 19 percent since the three
months ended June 30, when $6 billion of high-yield bonds
exchanged hands on average each day, Trace data show.
Speculative-grade securities are rated below Baa3 by Moody’s
Investors Service and lower than BBB- at Standard & Poor’s.

The debt posted a 1.4 percent decline in the period, its
biggest quarterly loss since 2011, as economists forecast the
Federal Open Market Committee would reduce monthly Treasury
purchases by $5 billion, to $40 billion, while maintaining its
buying of mortgage-backed securities at $40 billion, according
to a Bloomberg News survey.

The bonds have reversed the losses in the third quarter,
gaining 2.4 percent as the Fed said in a Sept. 18 statement that
it “decided to await more evidence that progress will be
sustained before adjusting the pace of its purchases.”

“For the first six months of the year people were buying
everything,” said Brian Biskupiak, senior trader and portfolio
manager at Hartford Investment Management Co., which oversaw
$118.1 billion as of June 30. “That’s why trading volumes were
high. People were complacent.”

Credit Benchmarks

Elsewhere in credit markets, IntercontinentalExchange Inc.,
the energy and commodity futures bourse that agreed to buy NYSE
Euronext for $8.2 billion, plans to sell $1.2 billion of bonds
to help finance the acquisition. The cost to protect against
losses on U.S. corporate bonds fell as investors speculated the
economic effects of the partial government shutdown will be
limited.

The Markit CDX North American Investment Grade Index, a
credit-default swaps benchmark that investors use to hedge
against losses or to speculate on creditworthiness, fell 1.7
basis points to 80.2 basis points as of 12:06 p.m. in New York,
according to prices compiled by Bloomberg.

Congress’s failure to pass a budget partially closed the
U.S. government for the first time in 17 years, idling as many
as 800,000 federal employees and setting the stage for a debate
on raising the nation’s debt ceiling within three weeks.

European Index

Both indexes typically decline as investor confidence
improves and rise as it deteriorates. Credit swaps pay the buyer
face value if a borrower fails to meet its obligations, less the
value of the defaulted debt. A basis point equals $1,000
annually on a contract protecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure of
debt-market stress, fell 0.56 basis point to 13.5 basis points.
The gauge typically narrows when investors favor assets such as
corporate bonds and widens when they seek the perceived safety
of government securities.

Bonds of Verizon Communications Inc. are the most actively
traded dollar-denominated corporate securities by dealers today,
accounting for 8.8 percent of the volume of dealer trades of $1
million or more, Trace data show.

ICE Offering

IntercontinentalExchange Group intends to issue five- and
10-year notes that may be redeemed at 101 cents on the dollar if
the purchase isn’t completed by March 31, according to a person
with knowledge of the transaction who asked not to be identified
because terms aren’t set.

The company will buy back $400 million of privately placed
notes by issuing an equal amount of commercial paper immediately
after the deal is completed, Standard & Poor’s said in a
statement today that estimated the offering size.

The bond sale would be the company’s first since 2011, when
it issued the debt it plans to buy back in equal $200 million
portions of 4.13 percent notes due November 2018 and 4.69
percent securities maturing 2021, according to data compiled by
Bloomberg.

Trading volumes are falling as the 21 primary dealers that
do business with the Fed reduce their junk-bond holdings to a
net $6.6 billion on Sept. 18 from $7.43 billion on April 3, when
the central bank changed the way it reported the data.
Inventories of a broader category of corporate debt fell 76
percent from the peak reached in October 2007 through the end of
March, the data show.

Crowded Positions

“It’s not like there’s a bank prop desk willing to take
the other side of the trade,” said Antczak, Citigroup’s head of
U.S. credit strategy in New York. “If you do have a crowded
position and a lack of trading, that’s where you could really
see some turmoil.”

The $3.86 billion of average daily junk-bond trading in
August was the lowest monthly volume of the year, Finra data
show. It compares with $6.5 billion of daily transactions in
January and about $6 billion on average in the first half of the
year. Junk-bond yields plunged to an all-time low of 5.98
percent on May 9 and spreads fell to 423 basis points, according
to the Bank of America Merrill Lynch U.S. High Yield Index.

Fed Chairman Ben S. Bernanke said policy makers are
“somewhat concerned” by tightening financial conditions and
continued their current level of asset purchases as a
“precautionary step.”

Spreads Widen

As concern mounted that the Fed would taper its bond
purchases, relative yields widened to an almost six-month high
of 534 basis points on June 24 from 423 on May 9, the lowest
since October 2007. Spreads have since contracted to 475 basis
points as of Sept. 27.

“As an investment manager, I trade when I have something
to do,” said Andrew Feltus, a money manager who helps oversee
about $37 billion in U.S. fixed-income assets at Pioneer
Investment Management Inc. in Boston. “As long as the
fundamentals don’t change, there’s a difference between
volatility and being wrong.”

The 12-month trailing speculative-grade default rate in the
U.S. fell to 2.8 percent in August, down from 2.9 percent in
July and 3.6 percent in August 2012, according to Moody’s.

Investment-grade volumes of $11.57 billion since the end of
June have been bolstered by $304.1 billion of sales of the
dollar-denominated debt in the third quarter, the most since the
$314.5 billion of offerings in the first three months of 2013,
Bloomberg data show.

Dealer Earnings

Verizon’s eight-part offering on Sept. 11 was almost triple
the previous record of $17 billion that Apple Inc. set in April,
Bloomberg data show. The sale included $15 billion of 6.55
percent, 30-year securities, the biggest individual corporate
bond ever.

“While the third quarter is typically seasonally soft, Q3
2013 appears to be turning into a full-scale rout in trading as
weak activity and limited risk-taking constrained performance,”
Hintz wrote in the Sept. 27 note.